This section and other parts of this Form 10-Q contain forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed below under the caption "Forward-Looking Statements" and in Part II, Item 1A (Risk Factors) of this Form 10-Q, and also those in Part I, Item 1A (Risk Factors) of our Annual Report on Form 10-K for 2019. The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the consolidated financial statements and notes thereto in our Annual Report on Form 10-K for 2019. All information is based on our fiscal calendar.
Overview
Ross Stores, Inc. operates two brands of off-price retail apparel and home fashion stores -- Ross Dress for Less® ("Ross") and dd's DISCOUNTS®. Ross is the largest off-price apparel and home fashion chain inthe United States , with 1,566 locations in 39 states, theDistrict of Columbia andGuam as ofAugust 1, 2020 . Ross offers first-quality, in-season, name brand and designer apparel, accessories, footwear, and home fashions for the entire family at savings of 20% to 60% off department and specialty store regular prices every day. We also operate 266 dd's DISCOUNTS stores in 20 states that feature a more moderately-priced assortment of first-quality, in-season, name brand apparel, accessories, footwear, and home fashions for the entire family at savings of 20% to 70% off moderate department and discount store regular prices every day.
Effects of the COVID-19 Pandemic on Our Business
The United States and other countries are experiencing an ongoing, major global health pandemic related to the outbreak of a novel strain of coronavirus, COVID-19. Governmental authorities in affected regions have taken and continue to take dramatic actions in an effort to slow down the spread of the disease. Like other retailers across the country, we temporarily closed all store locations, our distribution centers, and buying and corporate offices. Our closures took effectMarch 20, 2020 , and we remained closed through a portion of our fiscal second quarter. We also instituted "work from home" measures for many of our associates. The impacts from the COVID-19 pandemic and the related economic disruption have had a material adverse impact on our results of operations, financial position, and cash flows in the first half of fiscal 2020. The condensed consolidated results reflect the significant revenue decline and other impacts from our temporary store closures (for approximately half of the first quarter and 25 percent of the second quarter). We expect material adverse effects from the pandemic to continue for an extended period of time, and through the current fiscal year. This will cause our results for interim periods throughout fiscal 2020 to not be comparable to our results in the corresponding prior year periods. All our store and distribution center locations were closed fromMarch 20, 2020 throughMay 14, 2020 , when we began a phased process of resuming operations. On average, our stores were open for about 75 percent of the second quarter, with the vast majority of our store locations open and operating by the end ofJune 2020 , though operating on shorter hours compared to the prior year. All our distribution centers were reopened by the end ofMay 2020 . The temporary closure of our stores significantly impacted our ability to sell seasonal inventory in a timely manner. As we reopened our stores and resumed operations, a significant portion of the merchandise in our stores was aged and out of season. We recorded an inventory valuation charge of$313 million in the first fiscal quarter of 2020 based on our estimate of the portion of inventory held as ofMay 2, 2020 that we expected to sell below its original cost. The ultimate impact of these markdowns was dependent on the pace of sell through of this inventory. During the initial reopenings, sales were ahead of our conservative plans as we benefitted from pent-up demand and aggressive markdowns. As a result of faster than expected sell through of the aged inventory, we recognized a$174 million benefit in the second quarter due to the partial reversal of the first quarter below cost inventory valuation charge. In the weeks after reopening, trends were negatively impacted from depleted store inventory levels while we were ramping up our buying and distribution capabilities. The ongoing effect of the pandemic on consumer behavior and spending patterns remains highly uncertain. Despite the initial surge in customer demand as our stores reopened, we expect customer demand to be suppressed for an extended period. In addition, it is possible that there may be resurgences in the spread of COVID-19 again in the future, in one or more regions, which could require stores and distribution centers to close again nationally, regionally, or in specific locations, and further negatively impact our revenue and operations. 17 -------------------------------------------------------------------------------- In response to COVID-19, we incurred costs to reopen our stores and distribution centers, and costs to implement additional processes and procedures to facilitate social distancing, enhance cleaning and sanitation activities, and to provide personal protective equipment to all associates. These actions, combined with various other actions taken to reduce costs, resulted in approximately$65 million of additional net costs in the second quarter of 2020. We expect to incur higher costs related to our response to COVID-19 on an ongoing basis. To preserve our financial liquidity and enhance our financial flexibility, we borrowed$800 million from our revolving credit facility inMarch 2020 , completed a$2.0 billion public bond offering inApril 2020 , and entered into a new$500 million 364-day senior revolving credit facility inMay 2020 . In addition, we suspended our stock repurchase program inMarch 2020 and suspended quarterly dividends inMay 2020 , and we have taken measures to reduce our expenses, inventory receipts, and planned capital expenditures. BeginningApril 5, 2020 , we implemented temporary furloughs for a large portion of our hourly store and distribution center and other associates in our buying and corporate offices who could not work productively while our stores and distribution centers were closed. Employee health benefits for eligible associates continued during the temporary furlough at no cost to the impacted associates. We also reduced payroll expenses through temporary salary reductions for senior executives and other personnel, which remained in effect untilMay 24, 2020 , when more than half of our stores reopened. In conjunction with these payroll expense reduction measures, effectiveApril 1, 2020 , the non-employee members of our Board of Directors suspended the cash elements of their director compensation, which remained in effect untilAugust 2020 .
In
Beginning inMay 2020 , we suspended rent payments associated with the leases for our temporarily closed stores. During the second quarter of fiscal 2020, we negotiated rent deferrals and/or rent abatements (primarily for second quarter lease payments) for a significant number of our stores. The repayment of the deferrals will be at later dates, primarily in fiscal 2021. We have recorded accruals for rent payment deferrals and have recorded rent abatements associated with the second quarter as a reduction of variable lease costs. Given the unprecedented impact the COVID-19 pandemic has had on our business, and the continued uncertainty surrounding the pandemic, including its unknown duration and severity, and the unknown overall impact on consumer demand and store productivity, we are unable to forecast the full impact on our business. We expect that impacts from the COVID-19 pandemic and the related economic disruption will have a material adverse impact on our consolidated results of operations, financial position, and cash flows throughout the remainder of fiscal 2020, in each interim period, and potentially beyond. 18 --------------------------------------------------------------------------------
Results of Operations
The following table summarizes the financial results for the three and six month
periods ended
Three Months Ended Six Months Ended August 1, 2020 August 3, 2019 August 1, 2020 August 3, 2019 Sales Sales (millions)$ 2,685 $ 3,980 $ 4,527 $ 7,777 Sales (decline) growth (32.5 %) 6.5 % (41.8 %) 6.1 % Comparable store sales (decline) 1 3 2 3 growth (12 %) 3 % n/a 2 % Costs and expenses (as a percent of sales) Cost of goods sold 77.4 % 71.4 % 87.7 % 71.3 % Selling, general and administrative 19.4 % 14.9 % 20.6 % 14.8 % Interest expense (income), net 1.1 % (0.1 %) 0.8 % (0.1 %) Earnings (loss) before taxes (as a percent of sales) 2.1 % 13.8 % (9.1 %) 14.0 % Net earnings (loss) (as a percent of sales) 0.8 % 10.4 % (6.3 %) 10.7 %
1 For three months ended
Stores. In response to the impacts from the COVID-19 pandemic, we have reduced our planned new store openings for fiscal 2020. We did not open any new stores in the second quarter of fiscal 2020, and plan to open about 39 stores in the fiscal third quarter. Our longer term expansion strategy is to open additional stores based on market penetration, local demographic characteristics, competition, expected store profitability, and the ability to leverage overhead expenses. We continually evaluate opportunistic real estate acquisitions and opportunities for potential new store locations. We also evaluate our current store locations and determine store closures based on similar criteria. Three Months Ended Six Months Ended Store Count August 1, 2020 August 3, 2019 August 1, 2020 August 3, 2019 Beginning of the period 1,832 1,745 1,805 1,717 Opened in the period - 28 27 56 Closed in the period - (1) - (1) End of the period 1,832 1,772 1,832 1,772 Sales. Sales for the three month period endedAugust 1, 2020 , decreased$1.3 billion , or 32.5%, compared to the three month period endedAugust 3, 2019 . This was primarily due to the negative impact from store closures during the period and COVID-19's negative impact on customer demand. We opened 60 net new stores betweenAugust 3, 2019 andAugust 1, 2020 . The sales from these stores partially offset the sales decline while the stores were open in the period. Sales for the six month period endedAugust 1, 2020 , decreased$3.2 billion , or 41.8%, compared to the six month period endedAugust 3, 2019 . This was primarily due to the negative impact from store closures during the period and COVID-19's negative impact on customer demand. We opened 60 net new stores betweenAugust 3, 2019 andAugust 1, 2020 . The sales from these stores partially offset the sales decline while the stores were open in the period. 19 -------------------------------------------------------------------------------- Comparable store sales. Due to the temporary closing of all our stores as a result of the COVID-19 global pandemic, our historical definition of comparable store sales is not applicable. For the three month period endedAugust 1, 2020 , in order to provide a performance indicator for our stores as they reopen, we are temporarily reporting comparable store sales to include stores initially classified as comparable stores at the beginning of fiscal 2020, and the sales increase or decrease of these stores for the days the stores were open in the current period against sales for the same days in the prior year. Given that stores were open for less than seven weeks of the 13-week period endedMay 2, 2020 , the comparable store sales metric for the six month period endedAugust 1, 2020 , is not meaningful, and is therefore not provided. For the three month period endedAugust 1, 2020 , comparable store sales were down 12% for reopened stores from the date of their reopening to the end of the fiscal second quarter. Comparable stores sales were impacted by COVID-19's negative impact on customer demand and by other factors. During the initial reopenings, sales were ahead of our conservative plans as we benefitted from pent-up demand and aggressive markdowns to clear aged inventory. In the weeks thereafter, trends were negatively impacted from depleted store inventory levels while we were ramping up our buying and distribution capabilities.
Our sales mix for the three and six month periods ended
Three Months Ended Six Months EndedAugust 1, 2020 1August 3 ,
2019
25 % 23 % 26 % 24 % Ladies 25 % 27 % 25 % 27 % Shoes 14 % 14 % 14 % 14 % Men's 14 % 15 % 13 % 14 % Accessories, Lingerie, Fine Jewelry, and Fragrances 13 % 13 % 13 % 13 % Children's 9 % 8 % 9 % 8 % Total 100 % 100 % 100 % 100 %
1 Sales mix for the three and six month periods ended
Our historic strategies and store expansion program have contributed to our sales gains in the past. However, given the impacts from the COVID-19 pandemic on our results for the first half of fiscal 2020, and the significant ongoing impacts and uncertainties, including the unknown overall impact on consumer demand and shopping behavior, and the unknown duration of the pandemic and responses to it (which may require stores and distribution centers to close again nationally, regionally, or in specific locations), we cannot be sure that our strategies and eventual resumption of our store expansion program will result in a continuation of our historical sales growth or in a recovery of, or an increase in net earnings.
Cost of goods sold. Cost of goods sold for the three month period ended
Cost of goods sold for the six month period endedAugust 1, 2020 , decreased$1.6 billion compared to the same period in the prior year, mainly due to the lower sales from the closing of all store locations starting onMarch 20, 2020 through a portion of the second quarter of fiscal 2020, COVID-19's negative impact on customer demand post store reopening, and the temporary furlough of most hourly associates in our distribution centers and some associates in our buying offices. These decreases were partially offset by higher markdowns used to clear aged and seasonal inventory, expenditures for COVID-19 related measures, and higher packaway-related expenses. Selling, general and administrative expenses. For the three month period endedAugust 1, 2020 , selling, general and administrative expenses ("SG&A") decreased$72.5 million compared to the same period in the prior year, mainly due to store closures and payroll-related cost reduction measures in response to the COVID-19 pandemic (including the temporary furlough of most hourly associates in our stores prior to reopening and some associates in our corporate offices) and reduction in non-business critical operating expenses, partially offset by COVID-related expenses for supplies, cleaning, and payroll related to additional safety protocols. 20 -------------------------------------------------------------------------------- For the six month period endedAugust 1, 2020 , SG&A decreased$215.4 million compared to the same period in the prior year, mainly due to store closures and payroll-related cost reduction measures in response to the COVID-19 pandemic (including the temporary furlough of most hourly associates in our stores prior to reopening, and some associates in our corporate offices) and reduction in non-business critical operating expenses, partially offset by payments to associates while our stores were closed net of the expected employee retention credits under the CARES Act, and COVID-related expenses for supplies, cleaning, and payroll related to additional safety protocols. Interest expense (income), net. Interest expense (income), net for the three and six month periods endedAugust 1, 2020 , increased$33.6 million and$45.9 million , respectively, compared to the same periods in the prior year. These increases were primarily due to higher interest expense on long-term debt due to the issuance of$2.0 billion of Senior Notes inApril 2020 , lower interest income due to lower interest rates, and higher interest expense on short-term debt due to the draw down on our$800 million revolving credit facility inMarch 2020 , partially offset by higher capitalized interest primarily related to the construction of ourBrookshire, Texas distribution center. Interest expense (income), net for the three and six month periods endedAugust 1, 2020 andAugust 3, 2019 , consists of the following: Three Months Ended Six Months Ended ($000 ) August 1, 2020 August 3, 2019 August 1, 2020 August 3, 2019
Interest expense on long-term debt
$ 38,512 $ 6,566 Interest expense on short-term debt 3,599 - 5,296 - Other interest expense 1,031 227 1,309 540 Capitalized interest (3,349) (1,118) (5,503) (1,883) Interest income (757) (7,174) (4,093) (15,640)
Interest expense (income), net
$ 35,521 $ (10,417) Taxes on earnings (loss). OnMarch 27, 2020 , the CARES Act was signed into law. The CARES Act made several significant changes to business tax provisions including modifications for net operating losses, employee retention credits, and deferral of employer payroll tax payments. The modifications for net operating losses eliminate the taxable income limitation for certain net operating losses and allow the carry back of net operating losses arising in 2018, 2019, and 2020 to the five prior tax years. Our effective tax rates for the three month periods endedAugust 1, 2020 andAugust 3, 2019 , were approximately 61% and 25%, respectively. The increase in the effective tax rate of 36% for the three month period endedAugust 1, 2020 compared to the three month period endedAugust 3, 2019 was primarily due to fluctuations in pre-tax earnings, partially offset by a revaluation of deferred taxes related to the CARES Act. Our effective tax rates for the six month periods endedAugust 1, 2020 andAugust 3, 2019 , were approximately 31% and 24%, respectively. The increase in the effective tax rate of 7% for the six month period endedAugust 1, 2020 compared to the six month period endedAugust 3, 2019 was primarily due to a pre-tax loss in the current period. The effective tax rate is impacted by changes in tax law and accounting guidance, location of new stores, level of earnings, tax effects associated with share-based compensation, and the resolution of tax positions. Net income (loss). Net income for the three month period endedAugust 1, 2020 was$22.0 million compared to$412.7 million for the three month period endedAugust 3, 2019 . The decrease of$390.7 million was primarily due to the lower sales resulting from the negative impact from the temporary store closures in the period and COVID-19's negative impact on customer demand, higher markdowns to clear aged and seasonal inventory (partially offset by the$174 million partial reversal of the first quarter below cost inventory valuation charge), and higher expenditures for COVID-19 related measures. Net loss for the six month period endedAugust 1, 2020 was$(283.8) million compared to net income of$833.9 million for the six month period endedAugust 3, 2019 primarily due to the lower sales from the closing of all store locations starting onMarch 20, 2020 through a portion of the second quarter of fiscal 2020, and COVID-19's negative impact on customer demand, higher markdowns to clear aged and seasonal inventory, payments to associates while our stores were closed, net of the expected employee retention credits under the CARES Act, and higher expenditures for COVID-19 related measures, partially offset by income tax benefits.
Earnings (loss) per share. Diluted earnings per share for the three month
periods ended
21 -------------------------------------------------------------------------------- endedAugust 1, 2020 , was attributable to the lower sales resulting from the negative impact from the temporary store closures in the period and COVID-19's negative impact on customer demand, higher markdowns to clear aged and seasonal inventory (partially offset by the$174 million partial reversal of the first quarter below cost inventory valuation charge), and higher expenditures for COVID-19 related measures. Diluted loss per share was$(0.81) for the six month period endedAugust 1, 2020 , compared to diluted earnings per share of$2.29 for the six month period endedAugust 3, 2019 . The diluted loss per share for the six months endedAugust 1, 2020 was primarily attributable to the lower sales from the closing of all store locations starting onMarch 20, 2020 through a portion the second quarter of fiscal 2020, and COVID-19's negative impact on customer demand, higher markdowns to clear aged and seasonal inventory, payments to associates while our stores were closed net of the expected employee retention credits under the CARES Act, and higher expenditures for COVID-19 related measures, partially offset by income tax benefits.
Financial Condition
Liquidity and Capital Resources
As previously noted,the United States and other countries are experiencing a major global health pandemic related to the outbreak of a novel strain of coronavirus, COVID-19. Governmental authorities in affected regions have taken, and continue to take, dramatic actions in an effort to slow down the spread of the disease. Similar to other retailers across the country, we temporarily closed all store locations, our distribution centers, and buying and corporate offices, effectiveMarch 20, 2020 throughMay 14, 2020 , when we began a phased process of resuming operations. On average, our stores were open for about 75 percent of the second quarter, with the vast majority of our store locations open and operating by the end ofJune 2020 , though operating on shorter hours compared to the prior year. All our distribution centers were reopened by the end ofMay 2020 . The impacts from the COVID-19 pandemic and the related economic disruption have had a material adverse impact on our results of operations, financial position, and cash flows in the first half of fiscal 2020. Our results reflect the impact of the significant revenue decline from our temporary store closures, higher markdowns to clear aged and seasonal inventory, and increased expenditures for COVID-19 related measures. To preserve our financial liquidity and enhance our financial flexibility, we borrowed$800 million from our revolving credit facility inMarch 2020 , completed a$2.0 billion public bond offering inApril 2020 , and entered into a$500 million 364-day senior revolving credit facility inMay 2020 . In addition, we suspended our stock repurchase program inMarch 2020 and suspended quarterly dividends inMay 2020 , and we have taken measures to reduce our expenses, inventory receipts, and planned capital expenditures. BeginningApril 5, 2020 , we implemented temporary furloughs for a large portion of our hourly store and distribution center and other associates in our buying and corporate offices who could not work productively while our stores and distribution centers were closed. Employee health benefits for eligible associates continued during the temporary furlough at no cost to the impacted associates. We also reduced payroll expenses through temporary salary reductions for senior executives and other personnel, which remained in effect untilMay 24, 2020 , when more than half of our stores reopened. In conjunction with these payroll expense reduction measures, effectiveApril 1, 2020 , the non-employee members of our Board of Directors suspended the cash elements of their director compensation, which remained in effect untilAugust 2020 .
In
Beginning inMay 2020 , we suspended rent payments associated with the leases for our temporarily closed stores. During the second quarter of fiscal 2020, we negotiated rent deferrals and/or rent abatements (primarily for second quarter lease payments) for a significant number of our stores. The repayment of the deferrals will be at later dates, primarily in fiscal 2021. We recorded accruals for rent payment deferrals and recorded rent abatements associated with the second quarter as a reduction of variable lease costs.
We ended the second quarter of fiscal 2020 with over
22 -------------------------------------------------------------------------------- Historically, our primary sources of funds for our business activities have been cash flows from operations and short-term trade credit. Our primary ongoing cash requirements are for merchandise inventory purchases, payroll, operating and variable lease costs, taxes, and for capital expenditures in connection with new and existing stores, and investments in distribution centers, information systems, and buying and corporate offices. We also used cash to repurchase stock under our stock repurchase program and to pay dividends, and we may use cash for the repayment of debt as it becomes due. Due to the COVID-19 pandemic and related economic disruptions, and with the temporary closure of all store locations effectiveMarch 20, 2020 which continued through a portion of the second quarter (and with the possibility that stores, distribution centers, and other facilities may need to close again), we anticipate interruptions to our cash flows from operations. We anticipate that we will be required to rely more on our cash reserves and we expect to carefully monitor and manage our cash position in light of ongoing conditions and levels of operations. Six Months Ended ($000 ) August 1, 2020 August 3, 2019 Cash provided by operating activities$ 172,421 $ 1,083,463 Cash used in investing activities (250,047) (249,797) Cash provided by (used in) financing activities 2,520,131 (868,344)
Net increase (decrease) in cash, cash equivalents, and restricted cash and cash equivalents
$ 2,442,505 $ (34,678) Operating Activities Net cash provided by operating activities was$172.4 million for the six month period endedAugust 1, 2020 . This was primarily driven by lower merchandise receipts as we closely managed inventory levels and used packaway inventory to replenish our stores. This was partially offset by merchandise payments for receipts prior to the shutdown of our operations and the net loss due to the lower sales from the closing of all store locations starting onMarch 20, 2020 through a portion of the second quarter. Net cash provided by operating activities was$1.1 billion for the six month period endedAugust 3, 2019 and was primarily driven by net earnings excluding non-cash expenses for depreciation and amortization. The decrease in cash flow from operating activities for the six month period endedAugust 1, 2020 , compared to the same period in the prior year was primarily driven by the net loss due to lower sales from the closing of all store locations starting onMarch 20, 2020 through a portion of the second quarter (compared to net earnings last year), partially offset by higher accounts payable leverage. Accounts payable leverage (defined as accounts payable divided by merchandise inventory) was 90%, 71%, and 74% as ofAugust 1, 2020 ,February 1, 2020 , andAugust 3, 2019 , respectively. The increase in accounts payable leverage from the prior year was primarily driven by lower packaway inventory, lower merchandise receipts, and extended payment terms. As a regular part of our business, packaway inventory levels will vary over time based on availability of compelling opportunities in the marketplace. Packaway merchandise is purchased with the intent that it will be stored in our warehouses until a later date. The timing of the release of packaway inventory to our stores is principally driven by the product mix and seasonality of the merchandise, and its relation to our store merchandise assortment plans. As such, the aging of packaway varies by merchandise category and seasonality of purchases, but typically packaway remains in storage less than six months. However, given the uncertainty around customer demand due to the COVID-19 pandemic, a portion of our current packaway inventory may remain in storage longer than our historical cycles. We expect to continue to take advantage of packaway inventory opportunities to maximize our ability to deliver bargains to our customers.
Changes in packaway inventory levels impact our operating cash flow. As of
Investing Activities
Net cash used in investing activities was$250.0 million and$249.8 million for the six month periods endedAugust 1, 2020 andAugust 3, 2019 , respectively, primarily related to capital expenditures. 23 -------------------------------------------------------------------------------- Our capital expenditures were$250.0 million and$250.3 million for the six month periods endedAugust 1, 2020 andAugust 3, 2019 , respectively. Our capital expenditures include costs to build, expand, and improve distribution centers (primarily related to the ongoing construction of ourBrookshire, Texas distribution center); open new stores and improve existing stores; and for various other expenditures related to our information technology systems, buying and corporate offices. As previously noted, due to the COVID-19 pandemic and related economic disruptions, and to preserve our financial liquidity, we reduced our capital expenditure plans for fiscal 2020. Capital expenditures for fiscal 2020 are projected to be approximately$420 million , compared to our original plan of approximately$730 million . Our remaining, planned capital expenditures are expected to be used to fund commitments related to the construction of ourBrookshire, Texas distribution center, costs for fixtures and leasehold improvements to open planned new Ross and dd's DISCOUNTS stores, investments in certain information technology systems, and for various other needed expenditures related to our stores, distribution centers, buying, and corporate offices. We expect to fund capital expenditures with available cash, including cash we obtained from our public debt offering and the draw down on our$800 million credit facility. Financing Activities Net cash provided by financing activities was$2.5 billion for the six month period endedAugust 1, 2020 . Net cash used in financing activities was$868.3 million for the six month period endedAugust 3, 2019 . The increase in cash provided by financing activities for the six month period endedAugust 1, 2020 , compared to the six month period endedAugust 3, 2019 , was primarily due to the completion of our$2.0 billion public debt offering, draw down on our$800 million revolving credit facility, and the suspension of our share repurchases and dividends in the second quarter of 2020. InJuly 2019 , we entered into an$800 million unsecured revolving credit facility, which replaced our previous$600 million unsecured revolving credit facility. The current credit facility expires inJuly 2024 , and contains a$300 million sublimit for issuance of standby letters of credit. The facility also contains an option allowing us to increase the size of our credit facility by up to an additional$300 million , with the agreement of the lenders. Interest on borrowings under this facility is based on LIBOR (or an alternate benchmark rate, if LIBOR is no longer available) plus an applicable margin (currently 75 basis points) and is payable quarterly and upon maturity. The revolving credit facility may be extended, at our option, for up to two additional one-year periods, subject to customary conditions. InMarch 2020 , we borrowed$800 million under our revolving credit facility. This loan bears interest at LIBOR plus 0.875% (currently 1.76%). As ofAugust 1, 2020 , we had$800 million outstanding, and no standby letters of credit were outstanding, under the revolving credit facility. InApril 2020 , we issued an aggregate of$2.0 billion in unsecured senior notes in four tenors as follows:$700 million of 4.600% Senior Notes dueApril 2025 ,$400 million of 4.700% Senior Notes dueApril 2027 ,$400 million of 4.800% Senior Notes dueApril 2030 , and$500 million of 5.450% Senior Notes dueApril 2050 . InMay 2020 , we amended the$800 million revolving credit facility (the "Amended Credit Facility") to temporarily suspend for the second and third quarters of fiscal 2020 the Consolidated Adjusted Debt to EBITDAR ratio financial covenant, and to apply a transitional modification to that ratio effective in the fourth quarter of fiscal 2020. The Amended Credit Facility also established a new temporary minimum liquidity requirement effective for the first quarter of fiscal 2020 and through the end ofApril 2021 . As ofAugust 1, 2020 , we were in compliance with these amended covenants. InMay 2020 , we entered into an additional$500 million 364-day senior revolving credit facility which expires inApril 2021 . Interest on borrowings under this facility will be based on LIBOR (or an alternate benchmark rate, if LIBOR is no longer available) plus an applicable margin (currently 175 basis points) and is payable quarterly and upon maturity. As ofAugust 1, 2020 , we had no borrowings under this facility, and the$500 million credit facility remains in place and available. The new revolving credit facility is subject to the same minimum liquidity and Consolidated Adjusted Debt to EBITDAR ratio financial covenants as are in the Amended Credit Facility. In addition, the new revolving credit facility contains restrictions on stock repurchases and restrictions on post draw down cash balances on the new revolving credit facility. As ofAugust 1, 2020 , we were in compliance with these covenants. 24 --------------------------------------------------------------------------------
In
We repurchased 1.2 million and 6.6 million shares of common stock for aggregate purchase prices of approximately$132.5 million and$640.3 million during the six month periods endedAugust 1, 2020 andAugust 3, 2019 , respectively. We also acquired 0.3 million and 0.6 million shares of treasury stock under our employee stock equity compensation programs, for aggregate purchase prices of approximately$32.3 million and$52.3 million during the six month periods endedAugust 1, 2020 andAugust 3, 2019 , respectively. InMarch 2019 , our Board of Directors approved a two-year$2.55 billion stock repurchase program through fiscal 2020. As of the end of the second quarter of fiscal 2020, we had$1.143 billion remaining under the stock repurchase program. Due to the current economic uncertainty stemming from the severe impact of the COVID-19 pandemic, we suspended our stock repurchase program inMarch 2020 . We have no plans to repurchase any additional shares for the remainder of the fiscal year. For the six month periods endedAugust 1, 2020 andAugust 3, 2019 , we paid cash dividends of$101.4 million and$186.6 million , respectively. Due to the current economic uncertainty stemming from the severe impact of the COVID-19 pandemic, we suspended our quarterly dividends inMay 2020 . The COVID-19 pandemic and related economic disruptions, including the temporary closure of all of our store locations effectiveMarch 20, 2020 through a portion of the second quarter, have and continue to create significant uncertainty and challenges. We believe that existing cash balances, bank credit lines, and trade credit are adequate to meet our near-term operating cash needs and to fund our planned capital investments.
Contractual Obligations and Off-Balance Sheet Arrangements
The table below presents our significant contractual obligations as ofAugust 1, 2020 : Less than 1 - 3 3 - 5 After 5 ($000 ) one year years years years Total¹
Recorded contractual obligations:
Senior notes $ -$ 65,000 $ 950,000 $ 1,300,000 $ 2,315,000 Short-term debt2 802,507 - - - 802,507 Operating leases 641,743 1,182,929 800,150 660,407 3,285,229New York buying office ground lease3 5,883 13,562 14,178 943,983 977,606
Unrecorded contractual obligations:
Real estate obligations4 8,930 33,671 35,620 109,672 187,893 Interest payment obligations 123,290 213,897 207,556 814,850 1,359,593 Purchase obligations5 2,272,543 15,199 3,731 - 2,291,473
Total contractual obligations
1 We have a$70.4 million liability for unrecognized tax benefits that is included in Other long-term liabilities on our interim Condensed Consolidated Balance Sheet. This liability is excluded from the schedule above as the timing of payments cannot be reasonably estimated. ² Includes$800 million draw down on our revolving credit facility and other short-term debt financing. 3 Our New York buying office building is subject to a 99-year ground lease. 4 Minimum lease payments for leases signed that have not yet commenced. 5 Purchase obligations primarily consist of merchandise inventory purchase orders, commitments related to construction projects, store fixtures and supplies, and information technology services, transportation, and maintenance contracts.
Other than the unrecorded contractual obligations noted above, we do not have
any material off-balance sheet arrangements as of
25 -------------------------------------------------------------------------------- Senior notes. As ofAugust 1, 2020 , we also had outstanding Series B unsecured senior notes in the aggregate principal amount of$65 million , held by various institutional investors. The Series B notes are due inDecember 2021 and bear interest at 6.530%. Borrowings under these Senior Notes are subject to certain financial covenants that were amended inJune 2020 , and are consistent with the corresponding covenants in the our existing revolving credit facilities. As ofAugust 1, 2020 , we were in compliance with these covenants.
We also had outstanding unsecured 3.375% Senior Notes due
InApril 2020 , we issued an aggregate of$2.0 billion in unsecured senior notes in four tenors as follows:$700 million of 4.600% Senior Notes dueApril 2025 ,$400 million of 4.700% Senior Notes dueApril 2027 ,$400 million of 4.800% Senior Notes dueApril 2030 , and$500 million of 5.450% Senior Notes dueApril 2050 .
All our senior notes are subject to prepayment penalties for early payment of principal.
Interest on these notes is included in interest payment obligations in the table above.
Standby letters of credit and collateral trust. We use standby letters of credit outside of our$800 million revolving credit facility in addition to a funded trust to collateralize our insurance obligations. As ofAugust 1, 2020 ,February 1, 2020 , andAugust 3, 2019 , we had$4.2 million ,$4.2 million , and$5.5 million , respectively, in standby letters of credit outstanding and$56.7 million ,$56.0 million and$55.9 million , respectively, in a collateral trust. The standby letters of credit are collateralized by restricted cash and the collateral trust consists of restricted cash, cash equivalents, and investments. Trade letters of credit. We had$10.7 million ,$11.2 million , and$28.2 million in trade letters of credit outstanding atAugust 1, 2020 ,February 1, 2020 , andAugust 3, 2019 , respectively.
Dividends. In
Critical Accounting Policies and Estimates
Management's Discussion and Analysis of Financial Condition and Results of Operations is based on our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States of America . The preparation of our condensed consolidated financial statements requires our management to make estimates and assumptions that affect the reported amounts. These estimates and assumptions are evaluated on an ongoing basis and are based on historical experience and on various other factors that management believes to be reasonable. Given the global economic climate and additional or unforeseen effects from the COVID-19 pandemic, these estimates are more challenging, and actual results could differ materially from our estimates. During the second quarter of fiscal 2020, there have been no significant changes to the critical accounting policies discussed in our Annual Report on Form 10-K for the year endedFebruary 1, 2020 .
See Note A to the Condensed Consolidated Financial Statements - Summary of Significant Accounting Policies (Recently Adopted Accounting Standards) for information regarding our adoption of ASU 2019-12.
26 --------------------------------------------------------------------------------
Forward-Looking Statements
This report may contain a number of forward-looking statements regarding, without limitation, the rapidly developing challenges and our plans and responses to the COVID-19 pandemic and related economic disruptions, including adjustments to our operations, planned new store growth, capital expenditures, and other matters. These forward-looking statements reflect our then-current beliefs, plans, and estimates with respect to future events and our projected financial performance, operations, and competitive position. The words "plan," "expect," "target," "anticipate," "estimate," "believe," "forecast," "projected," "guidance," "looking ahead," and similar expressions identify forward-looking statements. Future impact from the ongoing COVID-19 pandemic, and other economic and industry trends that could potentially impact revenue, profitability, operating conditions, and growth are difficult to predict. Our forward-looking statements are subject to risks and uncertainties which could cause our actual results to differ materially from those forward-looking statements and our previous expectations, plans, and projections. Such risks are not limited to but may include: •The uncertainties and potential for further significant business disruptions arising from the recent and ongoing COVID-19 pandemic, including distribution center closures, store closures, and restrictions on customer access. •Unexpected changes in the level of consumer spending on, or preferences for, apparel and home-related merchandise, which could adversely affect us. •Impacts from the macro-economic environment, financial and credit markets, geopolitical conditions, pandemics, or public health and public safety issues, that affect consumer confidence and consumer disposable income. •Our need to effectively manage our inventories, markdowns, and inventory shortage in order to achieve our planned gross margins. •Competitive pressures in the apparel and home-related merchandise retailing industry. •Risks associated with selling and importing merchandise produced in other countries and from supply chain disruptions in other countries, including those due to COVID-19 closures. •Unseasonable weather that may affect shopping patterns and consumer demand for seasonal apparel and other merchandise. •Our dependence on the market availability, quantity, and quality of attractive brand name merchandise at desirable discounts, and on the ability of our buyers to purchase merchandise to enable us to offer customers a wide assortment of merchandise at competitive prices. •Information or data security breaches, including cyber-attacks on our transaction processing and computer information systems, which could result in theft or unauthorized disclosure of customer, credit card, employee, or other private and valuable information that we handle in the ordinary course of our business. •Disruptions in our supply chain or in our information systems that could impact our ability to process sales and to deliver product to our stores in a timely and cost-effective manner. •Our need to obtain acceptable new store sites with favorable consumer demographics to achieve our planned new store openings. •Our need to expand in existing markets and enter new geographic markets in order to achieve planned market penetration. •Consumer problems or legal issues involving the quality, safety, or authenticity of products we sell, which could harm our reputation, result in lost sales, and/or increase our costs. •An adverse outcome in various legal, regulatory, or tax matters that could increase our costs. •Damage to our corporate reputation or brands that could adversely affect our sales and operating results. •Our need to continually attract, train, and retain associates with the retail talent necessary to execute our off-price retail strategies. •Our need to effectively advertise and market our business. •Changes inU.S. tax, tariff, or trade policy regarding apparel and home-related merchandise produced in other countries, which could adversely affect our business. •Possible volatility in our revenues and earnings. •An additional public health or public safety crisis, demonstrations, natural or man-made disaster inCalifornia or in another region where we have a concentration of stores, offices, or a distribution center that could harm our business. •Our need to maintain sufficient liquidity to support our continuing operations and our new store openings. The factors underlying our forecasts are dynamic and subject to change. As a result, any forecasts or forward-looking statements speak only as of the date they are given and do not necessarily reflect our outlook at any other point in time. We disclaim any obligation to update or revise these forward-looking statements. 27
--------------------------------------------------------------------------------
© Edgar Online, source